Why Can’t We Do What Our Great Granddads Did?

Gilles Stockton sees a cattle market solution that will work, and one that the meatpackers will fight.

January 18, 2021

Last summer our son visited and brought his puppy which gave us endless amusement watching that dog chase her tail.  That was fun, but I am getting sick and tired of watching cattle producers chase their tails on market reform ideas that go nowhere.

Most of us have known for a long time that the cattle market is dysfunctional, but there has not been much of a desire to do anything about it.  Last year’s fire in a Tyson packing plant and the market disruptions caused by the COVID – 19 epidemic hit a nerve and perhaps we have a consensus that something needs doing to restore competitive pricing in the fat cattle market. But what?  That is the sticking point.

The 50/14 proposal, where half of the cattle would be sold on the spot market, is being advanced by a number of cattle organizations. However, they neglect to tell us just how this concept can be legal.  No one has pointed to a statute that can compel a meat packer that they must purchase half of their needs in a government-mandated manner?

Answer me that question and maybe I can take the 50/14 proposal seriously.  And what about the cattle feeders? If packers are required to buy 50% of the fat cattle on the spot market, then feeders would also be required to sell 50% of their cattle that way.  How can such a scheme be legal and how will it be policed? And then remember, if half the cattle are sold on the spot market, the other half continues to be unpriced captive supply.  Does the 50/14 approach really fix anything?  It looks to me to be like using a Band-Aid on a gaping wound.

Naturally, the National Cattlemen’s Beef Association (NCBA) cannot go along with something that any other organization proposed, so they have countered the 50/14 plan with some kind of incomprehensible “volunteer” 75% market proposal.  NCBA did go one step further to put real teeth into their plan.  They threatened that if the packers do not follow the 75% plan, NCBA would do SOMETHING. Do what they did not say.  Perhaps hold their breath until they turn blue!

Some are saying that having a stronger spot market is one thing, but what is really needed are more negotiated sales for fat cattle.  They argue that feeders should negotiate more vigorously for formula contracts.  Yes, they undoubtedly should, but the reason that we have a situation where there is an almost nonexistent spot market while the bulk of the cattle are sold through unpriced captive supply arrangements is because the packers have arranged things that way.  Why would they haggle with feeders when they know that the cattle will come to them on the packer’s terms anyway? That is why it is called captive supplies.

There seems to be a hope that if the Justice Department (DOJ) investigates that they would do something to hold the packers accountable for the market dysfunction.  I hate being the “Debby Downer” but the Justice Department does not have jurisdiction over the Packer and Stockyards Act.  That is the responsibility of the Department of Agriculture.

DOJ can investigate under the Sherman Antitrust Act which forbids market collusion.  The trouble is that collusion is defined very narrowly.  Corporate executives must be found to be sitting down together and actually negotiating prices and market share.  The packers are smarter than that, besides they have whole buildings full of lawyers making sure that their executives do not directly collude.  Indirect collusion, however, is perfectly legal.

“There is a way to restore competition in the fat cattle market that is both legal and doable.” 

There is a way to restore competition in the fat cattle market that is both legal and doable.  All that needs to happen is to do what they did 100 years ago when the packing cartel of that era was required to divest of their proprietary market system and instead bid for cattle in a public competitive marketplace.

This approach solves both the captive supply and thin spot market problem.  And it is both legal and has legal precedence. The Packers and Stockyards Act clearly states that the “effect” of having a dysfunctional market is sufficient grounds for the Secretary of Agriculture to take action.  All that the Secretary needs to do is require that the packers bid in a public competitive market place.

The beauty of this approach is that there would be no new bureaucracy required to enforce it. The privately-run market places will do so automatically because feeders would offer their cattle and packers would bid for their needs in open competition. If feeders and packers agree that they prefer to contract some of the cattle for future delivery, then there could be a public market for future contracts. We do that all the time with feeder calves through video/electronic markets that work very well.

There are some in this industry who are always telling us how important it is to be able to “sell on the grid.”  Apparently, if feeders don’t “sell on the grid” all manner of terrible things would happen – quality would crash and consumers would stop buying.  I don’t know about all that, but requiring that cattle be publicly priced does not hinder “selling on the grid” in any manner what-so-ever.  All that needs to happen is that a base price is set and the terms of the grid published at the time the contract is made. It is just that simple.

Let’s stop chasing our tails and put our efforts to solving our market dysfunction once and for all. Our great granddads did it in 1921.  Why can’t we do the same in 2021?

Gilles Stockton
Grass Range, Montana